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Deflation,  Why  and  How? 

By 

PROFESSOR  R  W.  KEMMERER 

_  TT  ^^  . 

Princeton  University 

An  Address  together  with  a  Discussion,  delivered  at  the 
Annual  Meeting  of 

The  Robert  Morris  Associates 

Atlantic  City,  N»  J» 
June  3rd,  1920 


ai^^Fif^Ai^ 


ISSUED  BY 

The  Robert  Morris  Associates 

(A  National  Organization  of  Bank  Credit  Men) 

SECRETARY'S  OFFICE 
AT  LANSDOWNE,  PENNSYLVANIA 


DEFLATION— WHY  AND  HOW? 

BY  y.  ^[   '  ''^..,^„;.,V. 

Prof.  E.  W.  Kemmei^er'   *    ■      .•"^i'^"- 
Princeton  University 

The  subject,  ^* Deflation,  Why  and  Howl"  is  a  live 
one  and  it  is  one  that  a  person  would  be  rash  to  try 
to  state  any  very  positive  opinions  concerning.  The 
more  I  dig  into  the  subject,  the  less  positive  I  am  in 
my  opinions  and  I  am  changing  those  opinions  every 
day,  so  I  would  like  to  say  at  the  beginning  that  any 
opinions  I  express  today  are  like  the  railroad  time 
tables,  subject  to  change  without  notice. 

The  first  point  in  any  discussion  of  this  subject  is 
the  question  of  inflation  itself,  for  before  we  deflate 
we  must  inflate  and  w^e  need  to  consider  very  briefly 
what  is  meant  by  the  term  inflation  and  a  few  facts 
concerning  inflation  itself. 

Now,  the  term  inflation  is  used  in  a  great  variety 
of  meanings,  and  I  want  to  make  my  own  meaning 
clear  at  the  beginning.  To  my  mind  inflation  occurs 
in  any  country  when  the  currency  and  circulating 
credit,  bank  notes  and  bank  deposits,  circulating  by 
checks,  increase  more  rapidly  than  the  physical  vol- 
ume of  business  to  be  carried  on.  When  the  media  of 
exchange  increases  more  rapidly  than  the  physical  vol- 
ume of  trade  which  they  are  used  in  effecting,  then 
you  have  inflation. 

Inflation  involves  depreciation.  It  is  nothing 
more  nor  less  than  the  old,  old  principle  of  the  law  of 
demand  and  supply.  When  your  circulating  medium 
increases  more  rapidly  than  the  demand  made  upon 
it,  as  expressed  in  the  volume  of  goods  to  be  exchanged, 
when  your  supply  of  money  increases  more  rapidly 
than  the  demand  at  the  old  price  level,  then  your 
money  depreciates,  and  when  your  money  depreciates, 
prices  go  up.  Rising  prices  is  another  method  of  say- 
ing that  the  dollar  is  depreciating. 

Depreciation  is  of  two  kinds.  The  first  we  may 
call  specific  depreciation.  This  takes  place  when  the 
money  in  the  country — ordinarily  it  is  paper  money — 
depreciates  in  terms  of  the  standard  money.    In  this 

442551 


country,  during  the  Civil  War,  the  paper  money  de- 
preciated in  terms  of  gold,  greenbacks  at  one  time 
going  .a§.  low  as  35  cents  on  the  dollar.  The  paper 
mpiaey  of  ;mo;4;t  oi  the  belligerent  countries  of  Europe 
today  has  greatly  depreciated  in  terms  of  gold.  That 
is  specific  depreciation.  We  are  not  concerned  with 
that  in  this  country.    We  haven't  it,  fortunately. 

The  other  kind  of  depreciation  is  general  depre- 
ciation, and  that  takes  place  when  your  standard  unit, 
your  monetar}^  unit  itself,  depreciates.  Our  standard 
unit  in  this  country  is  the  gold  dollar,  and  when  the 
gold  dollar  mth  which  all  of  our  other  kinds  of  money 
are  at  par  depreciates  in  its  relation  to  goods,  then 
you  have  general  depreciation  of  the  gold  dollar  itself, 
and  it  is  that  type  of  depreciation  that  we  have  today 
in  the  United  States. 

A  few  words  in  .regard  to  the  facts  of  inflation 
before  we  consider  deflation.  I  have  made  some  stud- 
ies to  try  to  get  some  line  as  to  the  extent  of  the  growth 
of  business  in  this  country  since  1913,  forgetting  dol- 
lars and  thinking  in  terms  of  physical  volume,  tons  of 
freight  carried,  bushels  of  different  kinds  of  grain 
produced,  pounds,  yards,  gallons,  and  so  on.  I  have 
taken  quite  a  number  of  items  that  are  representative 
of  large  groups  of  industries.  In  each  case  I  have 
called  the  physical  production  or  physical  trade  in  1913 
100  and  then  expressed  the  year's  growth  of  each  suc- 
ceeding year  in  terms  of  percentages  or  index  num- 
bers, as  we  call  them.  These  I  have  combined  into  a 
general  index  number  of  the  physical  volume  of  busi- 
ness, and  I  find  that  there  has  been  very  little  growth 
in  business  since  1913,  much  less  than  a  normal  growth, 
not  over  a  fifth  or  sixth  as  much  as  the  growth  for  the 
same  length  of  time  in  ordinary  times  of  peace. 

If  you  call  the  physical  volume  of  business  in  1913 
100,  the  physical  volume  of  business  in  1918  was  113, 
and  the  physical  volume  of  business  in  1919  was  109.6, 
a  decline  of  3  per  cent,  last  year. 

While  we  have  been  having  this  slight  increase  in 
the  physical  volume  of  business,  we  have  been  expand- 
ing at  a  tremendous  rate  the  circulating  media  by 
wMch  we  carry  on  this  business.     The  money  in  cir- 


culation  in  this  country — and  I  am  deducting  the  re- 
serves against  Federal  Reserve  notes  because  I  am 
counting  the  notes  as  in  circulation — the  money  in  cir- 
culation in  this  country  increased  during  the  same  time 
71  per  cent. 

About  80  to  85  per  cent,  of  the  business  of  the  coun- 
try is  done  by  means  of  deposits  circulating  through 
bank  checks,  and  the  bank  deposits  of  commercial 
banks  increased  during  the  same  time  120  per  cent. 
The  average  percentage  of  ultimate  legal  reserve  of 
national  banks  under  the  Federal  Reserve  system,  ul- 
timate cash,  wherever  it  is,  has  been  cut  down  to  about 
one-fifth  what  it  was  in  1913. 

I  can't  go  into  that,  but  you  can  easily  see  how  it 
would  work  out.  Take  a  national  bank,  well  say  in 
New  York  City,  Chicago  or  St.  Louis,  a  central  reserve 
city.  Before  1914  such  a  bank  was  required  to  keep 
25  per  cent  cash  reserve  in  bank,  now  13  per  cent,  all 
of  which  is  on  deposit  with  the  Federal  Reserve  Bank. 
The  Federal  Reserve  Bank  has  to  keep  against  that 
deposited  reserve  a  legal  reserve  of  35  per  cent ;  35  per 
cent  of  13  per  cent  is  4.55  per  cent,  which  is  less  than 
one-fifth  of  the  original  25  per  cent. 

When  you  make  allowances  for  the  reduction  of 
reserve  requirements  against  time  deposits,  which  are 
only  3  per  cent  now,  and  for  different  methods  of 
counting  the  redemption  fund  against  notes,  etc.,  you 
will  find  there  has  been  a  reduction  in  legal  reserve 
requirements  to  about  one-fifth  what  they  were  before, 
and  we  have  released  this  tremendous  amount  of 
money. 

Meanwhile,  we  were  exporting  very  heavily  sup- 
plies of  all  kinds  to  belligerent  Europe,  and  we  were 
taking  our  pay  in  substantial  quantities  in  gold,  and 
so  we  brought  into  this  country  during  the  war  some- 
thing like  a  billion  dollars  of  gold.  We  piled  up  the 
gold  in  the  country ;  we  put  an  embargo  on  it,  prevent- 
ing its  going  out ;  we  reduced  our  legal  reserve  require- 
ments, and  then  we  expanded  and  expanded,  and  so 
we  have  had  this  120  per  cent  increase  in  deposit  cur- 
rency, and  71  per  cent  increase  in  money,  while  the 
physical  volume  of  business  has  increased  less  than  10 
per  cent. 


Well,  it  isn't  at  all  surprising  that  prices  simply- 
leaped  upwards.  There  is  no  use  going  into  those  fig- 
ures, they  are  familiar  to  all  of  you.  The  Bureau  of 
Labor's  figures  show  wholesale  prices  on  the  average 
increasing  153  per  cent  since  1913,  and  retail  prices 
of  food  about  100  per  cent.  The  U.  S.  Government's 
investigation  of  the  cost  of  living,  including  rents  and 
all  sorts  of  expenses,  of  laboring  men's  families,  a 
study  covering  12,000  families  in  90  odd  cities,  showed 
up  to  l^ovember,  1919,  an  increase  in  their  budgets  of 
83  per  cent  and  it  will  probably  run  larger  now. 

The  recent  investigation  of  the  Massachussetts 
Commission  on  the  Necessaries  of  Life  showed  for 
Massachusetts  an  increase  to  January  of  this  year  of 
92  per  cent.  So  the  cost  of  living  has  been  practically 
doubled,  and  wholesale  prices  have  been  increased  even 
at  a  higher  rate. 

Just  a  word  in  regard  to  wages.  The  striking 
thing  in  regard  to  wages  is  the  unevenness  of  the  in- 
crease. I  picked  up  a  short  time  ago  a  copy  of  the 
Lcibor  Review  of  the  Bureau  of  Labor  Statistics,  and 
there  were  some  figures  concerning  union  rates  of 
wages  in  different  lines  of  industry,  and  they  started 
alphabetically,  and  one  of  the  first  pages  gave  brick- 
layers and  boilermakers.  They  were  given  side  by 
side.  They  both  began  with  ^*B" — that  was  the  only 
reason  they  were  put  side  by  side.  I  want  to  just  cite 
this  as  a  typical  illustration  of  what  has  been  taking 
place.  These  are  union  rates  of  wages  per  hour,  first 
for  boilermakers  in  manufacturing  and  jobbing  shops 
in  25  mdely-scattered  American  cities,  and  the  others 
are  the  same  figures  for  bricklayers  in  40  cities.  In 
a  few  cities  the  men  in  these  trades  received  wage  in- 
creases since  1913  more  than  sufficient  to  meet  the  in- 
crease in  the  cost  of  living. 

In  Baltimore,  for  example,  the  rate  for  boiler- 
makers increased  161  per  cent,  and  in  Charleston  the 
rate  for  bricklayers  increased  88  per  cent.  Now  both 
of  those  increases  were  probably  larger  than  the  cost 
of  living. 

On  the  other  hand,  the  rate  for  boilermakers  in 
Chicago  was  40  cents  an  hour  in  1913,  it  had  only  gone 


to  60  cents  in  1919,  and  here  was  a  rate  considerably 
less  than  the  increase  in  the  cost  of  living. 

The  average  rate  for  boilermakers  in  25  cities  in- 
creased 82  per  cent,  which  was  just  about  enough  to 
make  up  for  the  cost  of  living.  The  average  rate  for 
bricklayers  in  the  40  cities  increased  only  34.4  per 
cent,  which  was  not  half  enough  to  make  up  for  the 
increase  in  the  cost  of  living.  Of  course,  the  building 
trade  wasn't  developing  very  much  during  the  war, 
whereas,  there  was  a  big  war  demand  for  men  in  lines 
like  boilermaking. 

The  striking  thing,  if  you  look  over  the  figures 
in  different  lines,  as  to  the  wage  increase,  is  its  great 
unevenness.  In  some  lines,  the  increase  has  been  very 
large,  much  more  than  enough  to  make  up  for  the  rise 
in  the  cost  of  living.  In  other  lines,  it's  been  pitifully 
small,  and  even  in  any  particular  line  you  may  find  in 
some  sections  of  the  country  the  increase  ample,  and 
in  other  sections  anything  but  ample. 

The  Government  has  made  a  very  careful  study  of 
eight  industries  as  far  as  wages  is  concerned ;  the  cigar 
industry,  men's  clothing,  furniture,  hosiery,  iron  and 
steel,  lumber,  silk  goods,  and  so  on,  and  these  indus- 
tries showed  increases  as  compared  with  1913,  as  fol- 
lows: 

The  first-named,  52  per  cent  increase;  next,  71 
per  cent;  next,  54  per  cent;  84  per  cent;  121  per 
cent;  94  per  cent;  51  per  cent;  91  per  cent.  In  other 
words,  four  increased  more  than  the  cost  of  living  and 
four  didn't  increase  as  much  as  the  cost  of  living. 

One  of  the  big  problems  of  deflation,  which  we 
come  to  later,  is  an  evening-out  here.  Some  lines  must 
be  leveled  up  and  other  lines  must  be  leveled  down. 
The  whole  thing  is  out  of  equilibrium,  and  that  prob- 
ably means,  I  am  sorry  to  say,  a  great  many  labor 
troubles  in  bringing  about  the  readjustment. 

Then,  another  big  factor  in  this  inflation  situation 
and  in  the  deflation  problem  confronting  us  is  in  the 
relations  between  debtor  and  creditor.  Money,  you 
will  all  appreciate,  is  good  for  what  it  will  buy,  no 
more  and  no  less.    That  is  what  we  want  it  for. 

The   purchasing   power   of  the   dollar   over   the 


things  we  buy  has  been  just  about  cut  in  half  since 
1913.  Think  what  that  means  as  regards  the  distribu- 
tion of  wealth  in  this  country!  I  think  this  is  one  of 
the  most  striking  facts  in  the  whole  situation.  It 
means  that  wealth  in  the  hands  of  a  great  many  peo- 
ple has  been  literally  cut  in  half.  Think  what  it  means 
as  regards  contractual  obligations  and  debts  in  va- 
rious forms!  Their  value  has  been  practically  cut  in 
half.  This  applies  to  bonds  that  you  had  in  1913  and 
are  holding  to  this  day ;  if  they  are  maturing  now,  they 
are  maturing  in  dollars  of  just  about  half  the  purchas- 
ing power  that  you  paid  for  them.  It  applies  to  large 
quantities  of  preferred  stock;  it  applies  to  real  estate 
mortgages,  to  savings  deposits.  A  person  who  had  a 
savings  account  in  1913  and  accumulated  interest  dur- 
ing the  whole  time  has  much  less  purchasing  power  to- 
day than  he  had  then.  It  applies  to  the  paid-up  value 
of  insurance  as  of  1913.  If  you  were  carrying,  say 
$20,000  insurance  in  1913,  because  you  felt  that  that 
amount  of  money  was  necessary  to  keep  the  wolf  from 
the  door,  you  need  $40,000  now  to  do  the  same  thing. 
Your  $20,000  has  been  cut  in  half. 

It  applies  to  pensions  and  all  sorts  of  things  of 
that  kind.  Now  this  fifty  per  cent  debasement  or  re- 
duction in  the  value  of  funded  incomes  or  income 
rights,  has  taken  place  whether  the  owner  was  a  highly- 
prosperous  individual,  a  money-making  corporation, 
an  endowed  university,  library  or  charitable  institu- 
tion or  a  widow  living  upon  a  pension  or  fixed  income 
derived  from  insurance  or  other  invested  funds. 

This  was  fundamentally  not  a  destruction  of 
wealth  at  all,  but  just  a  transfer  of  wealth  and  a 
transfer  of  wealth  to  the  amount  of  billions  and 
tens  of  billions  of  dollars.  It  has  taken  prop- 
erty from  some  and  given  it  to  others.  In  gen- 
eral, it  has  taken  from  the  creditor  and  given  to  the 
debtor.  Specifically,  it  has  taken  from  the  bondholder 
and  given  to  the  stockholder.  Practically  all  excess 
profits  and  all  accretions  to  the  value  of  the  plant  aris- 
ing from  inflated  prices  have  gone  to  the  stockholder, 
while  the  bondholder  has  been  entitled  to  only  a  fixed 
amount  of  a  rapidly  depreciating  dollar. 


Inflation  has  taken  from  the  mortgagee  and  given 
to  the  mortgagor.    It  has  taken  from  the  recipient  of 
military  pensions  and  given  to  the  Government  and  the 
taxpayer.    It  has  taken  from  the  savings  bank  depos- 
itor and  given  to  the  savings  bank  borrower,   who 
may  be  paying  off  his  mortgage  in  dollars  of  half  the 
value  that  he  borrowed.    It  has  taken  from  our  insti- 
tutions of  learning  and  given  to  the  students'  parents, 
through  cutting  in  half  tuition  charges.     It  has  also 
given  to  the  debtors — stockholders,  or  governmental 
units — who  are  obligors  on  the  bonds  in  which  univer- 
sity endowments  are  invested.    Of  that  that  has  been  given 
to  the  debtor  in  this  period  of  upheaval  in  the  relations 
between  debtor  and  creditor,  much  has  been  taken  by 
the  Government  in  war  taxes.     That  which  has  been 
taken  from  the  holder  of  railroad  bonds  and  the  bonds 
of  other  public  utilities,  the  rates  for  whose  services 
have  been  unduly  held  down  by  Government  action 
while  expenses  have  been  rising,  has  not  to  any  extent 
been  given  to  the  stockholders,  but  has  been  given  to 
the  shippers,  the  merchants,  and  the  ultimate  con- 
sumer in  varying  degrees. 

Now  another  point  I  want  to  emphasize  in  this 
connection  is  this :  Much  that  has  been  given  to  the  pub- 
lic has  been  used  in  extravagant  living,  because  the 
money  has  been  taken  away  largely  from  the  thrifty 
capital-saving  and  capital-investing  classes,  and,  to  a 
considerable  extent  been  given  to  people  who  have  not 
formed  such  habits  of  thrift,  the  new-rich,  the  people 
who  have  not  yet  learned  the  lessons  of  saving  and  in- 
vestment. 

So  I  want  to  summarize  this  particular  point  in 
these  words:  Inflation  has  been  a  tremendous  engine 
of  wealth  redistribution.  It  has  acted  powerfully,  but 
it  has  acted  blindly.  It  has  been  no  respecter  of  per- 
sons or  of  individuals.  It  has  benefited  some  and  it 
has  cruelly  and  unjustly  penalized  others. 

Well,  now",  w^hat  are  we  going  to  do  about  it  ^  Our 
prices  are  away  up  here  in  the  seventh  heaven,  and  they 
are  unstable  and  uncertain,  and  the  program  that  is 
generally  suggested  is  deflation,  the  reverse  of  infla- 
tion. 


Deflation,  however  necessary  it  may  be,  is  a  pain- 
ful process.  It  causes  evils  of  its  own  and  evils  that 
are  to  a  large  extent  the  reverse  of  the  evils  we  have 
been  having  during  inflation.  Deflation  means  falling 
prices,  falling  prices  mean  an  increasingly  valuable 
dollar.  This  means  that  the  debtor  who  has  been  bor- 
rowing money  during  this  period  of  high  and  rising 
prices  and  who  is  going  to  pay,  in  the  next  few  yerars 
or  in  many  years  to  come,  will  be  paying  his  debts  in 
an  increasingl}^  valuable  dollar,  more  valuable  than  the 
one  he  borrowed.  Deflation  burdens  the  debtor,  and 
benefits  the  creditor.  It  was  the  evils  of  a  long  period 
of  declining  prices,  as  you  recall,  from  1873  to  1895  and 
1896  that  led  to  the  great  bimetallic  controversy.  The 
evils  featured  by  bimetallists  in  that  controversy  were 
the  appreciating  currency  and  the  burdens  on  the 
debtor  classes  of  falling  prices  and  an  increasingly 
valuable  dollar,  the  necessity  of  the  farmer  and  others 
paying  their  mortgages  off  in  a  dollar  of  a  greater  pur- 
chasing power  than  the  ones  they  borrowed,  while  the 
prices  of  the  things  they  had  to  sell  were  declining. 

If  we  have  deflation,  we  must  have  this  reversion 
of  the  situation.  During  this  period  of  inflation,  we 
have  floated  in  this  country  and  in  Europe  the  greatest 
Governmental  debts  the  world  has  ever  seen.  If  these 
billions  and  tens  of  billions  of  dollars,  francs  and 
pounds  which  the  governments  have  borrowed  in  cheap 
money  are  to  be  paid  back  in  increasingly  valuable 
money,  and  if  the  taxpayers  are  to  provide  the  funds, 
you  will  see  you  have  a  serious  situation. 

Then,  too,  falling  prices  depress  business.  It  is 
perfectly  obvious  that  the  minute  the  general  business 
public  makes  up  its  mind  that  prices  are  going  down, 
every  one  holds  off  for  the  fall.  People  don't  want  to 
capitalize  these  high  prices  in  extending  their  equip- 
ment or  in  building.  They  don't  want  to  buy  raw  ma- 
terial* at  these  high  prices  if  the  prices  are  going  to  be 
lower  later.  Retailers  don't  want  to  stock  up;  they 
want  to  unload  before  prices  fall.  They  don't  want  to 
employ  labor,  and  so  the  minute  your  prices  begin  to  go 
down  you  have  depressing  influence  on  business,  for 
everyone  holds  off  and  waits  for  the  decline. 


That  means  as  it  has  meant  in  the  past — a  ten- 
dency to  increasing  unemployment.  I  don't  believe 
that  organized  labor  is  going  to  yield  if  it  can  help  it 
on  the  wage  situation.  They're  going  to  try  to  clinch 
what  they  have.  In  a  great  many  cases  they  haven't 
received  enough  to  meet  the  increase  in  the  cost  of  liv- 
ing. But  if  they  don't  yield  there  will  be  an  increasing 
amount  of  unemployment  and,  of  course,  the  increasing 
amount  of  unemployment  will  tend  in  itself  to  weaken 
the  unions. 

So,  if  we  proceed  with  a  program  of  deflation,  we 
must  anticipate,  I  am  afraid,  a  period  of  depression 
and  readjustment.  I  don't  want  to  be  pessimistic, 
but  we  must  view  the  facts  as  they  are,  and  both  theory 
and  the  experience  of  the  past  in  this  country  during 
the  greenback  period  and  in  Europe  at  other  times, 
bear  out  the  conclusion  that  a  period  of  deflation  is 
likely  to  be  a  period  of  a  considerable  amount  of  busi- 
ness depression;  none  the  less,  deflation  is  necessary. 

If  we  continue  to  inflate,  we  simply  continue  this 
process  of  progressive  injustice  to  the  creditor  classes 
and 'to  the  people  whose  wages  lag  way  behind  prices 
on  the  increase.  And  sooner  or  later,  if  we  continue 
to  inflate,  the  bubble  is  going  to  burst ;  there  is  nothing 
else. 

Then,  again,  we  simply  cannot  maintain  prices  on 
this  high  level,  in  my  judgment,  because  we  have  not, 
and  the  world  has  not,  an  adequate  gold  base  to  sup- 
port the  credit  structure  that  we  now  have.  Most  of 
the  leading  countries  of  Europe  are  off  the  gold  stand- 
ard. Their  gold  reserves  are  reduced  to  very  small 
percentages  of  w^hat  they  were  in  pre-war  times,  and 
their  paper  is  depreciated  and  inconvertible. 

In  order  to  bring  their  gold  reserves  up  to  a  point 
that  can  maintain  their  currencies  at  par,  maintain 
the  solvency  of  their  credit,  there  will  have  to  be  a  very 
great  contraction  of  the  circulating  credit  that  is  out, 
bank-deposits  and  bank-note. 

I  don't  want  to  bore  you  with  details  in  that,  but 
let  me  give  you  just  a  few  selected  figures  that  will  be 
suggested. 

The  bank  notes  outstanding  from  the  Issue  De- 


partment  of  the  Bank  of  England  in  May,  1914,  just 
before  the  war,  had  a  gold  reserve  backing  of  65  per 
cent.  Since  the  war,  England  has  issued  a  large 
amount  of  currency  notes  in  addition  to  her  bank  notes, 
and  at  the  present  time  the  gold  reserve  back  of  the 
Bank  of  England  notes  and  the  currency  notes  com- 
bined (this  is  the  figure  of  March  31)  was  32  per  cent. 
— less  than  half  what  it  was  in  pre-war  times — and 
there  was  a  feeling  of  uneasiness  in  1913  and  1914  'that 
the  reserves  then  were  inadequate,  and  there  was  quite 
an  agitation  in  England  to  increase  them. 

On  May  20,  1914,  the  Bank  of  England  was  carry- 
ing a  reserve  of  about  44  per  cent  against  its  deposits, 
and  that  was  fairly  normal,  although  there  was  some 
criticism  there  that  it  wasn't  adequate. 

On  May  19th  of  this  3^ear  that  44  per  cent  had 
been  reduced  to  I614  per  cent. 

The  Bank  of  France  just  before  the  war  was  car- 
rying reserves  against  its  notes  and  deposits  of  64  per 
cent,  and  on  May  20th  of  this  year,  of  9.2  per  cent,  less 
than  one-fifth. 

For  the  Bank  of  Italy,  the  reduction  was  from 
71  per  cent,  to  about  11  per  cent.;  for  the  National 
Bank  of  Belgium,  from  32  per  cent,  to  5  per  cent. ;  the 
Bank  of  Japan,  which  was  supposed  to  have  gotten 
lots  of  gold  and  to  be  in  a  very  strong  position  before 
this  recent  trouble,  showed  a  reduction  from  43  per 
cent,  to  about  36  per  cent.,  and  then  when  you  come, 
of  course,  to  Germany  and  Austria  and  Russia,  you 
have  a  terrible  situation  as  regards  the  reserves.  The 
metallic  reserve  of  the  German  Reichs  bank  decreased 
from  48  to  1.8  per  cent ;  of  the  Bank  of  Austria-Hun- 
gary from  74  per  cent  to  .43  of  1  per  cent;  and  for 
Russia,  well,  we  haven't  any  figures,  and  if  we  did  they 
would  require  so  many  zeroes  in  expressing  the  decimal 
that  it  would  be  difficult  to  read. 

Some  of  the  neutral  countries  have  increased  their 
reserves  a  little,  but  many  of  them  have  greatly  re- 
duced them,  and  the  neutral  countries  pn  the  whole 
are  of  secondary  importance. 

Taken  as  a  whole,  the  figures  show  Europe's  gold 
supply  wholly  inadequate  for  the  present  credit  struc- 


ture,  and  Europe  can  never  get  back  to  a  gold  basis 
without  a  tremendous  contraction. 

In  the  United  States,  it  is  difficult  to  give  figures 
that  are  entirely  reliable,  because  we  have  changed  our 
methods  of  computing  reserves  since  the  war  and  be- 
cause the  Government  no  longer  gives  in  its  publica- 
tions, official  or  otherwise,  the  amount  of  gold  held  in 
the  vaults  of  the  banks  themselves,  aside  from  the  Fed- 
eral Reserve  banks;  but  we  can  get  some  little  hint. 
Briefly  summarized,  the  situation  is  this : 

On  July  1, 1914,  our  stock  of  gold  coins  and  bullion 
in  the  country,  in  circulation  and  in  the  Treasury,  was 
55.3  per  cent  of  our  total  monetary  circulation,  and  on 
May  1, 1920,  it  was  44  per  cent ;  but  that  is  only  a  small 
part  of  the  story  because  most  of  our  business  in  this 
country  is  done  by  checks  and  deposits.  Our  great  ex- 
pansion was  in  deposits.  Confining  ourselves  to  na- 
tional banks,  for  we  haven't  satisfactory  figures  for 
State  institutions,  we  find  that  the  average  ratio  of  our 
gold  stock  to  deposits,  exclusive  of  bankers'  balances 
and  after  making  proper  deductions  for  Federal  Re- 
serve notes,  just  before  the  war,  w^as  29.7  per  cent,  and 
that  now  it  is  13  per  cent.  Our  gold  position  then,  is 
far  below  that  of  pre-war  time,  and  we  have  been  losing 
gold  on  net  balances  continually  since  May,  1919.  Our 
net  loss  since  January  is  nearly  four  hundred  millions. 

To  us,  however,  more  than  to  any  other  country, 
belligerent  Europe  ultimately  will  look  for  the  replen- 
ishment of  her  gold  in  order  to  return  to  a  specie  basis, 
and  while  this  is  going  on,  the  world's  gold  production 
has  been  falling  off.  The  production  in  1919  was  about 
20  per  cent  less  than  the  year  before  the  war. 

So,  whether  we  like  it  or  not,  there  is  not  enough 
gold  in  this  country  or  enough  gold  in  the  world  to 
maintain  under  stable  conditions  a  credit  structure 
that  is  anything  like  as  large  as  that  we  now  have. 

A  second  reason  for  deflation,  although  one  that 
grows  weaker,  as  time  goes  on,  I  am  merely  mention- 
ing it  parenthetically,  consists  in  the  fact  that  infla- 
tion's work  has  not  yet  been  completed,  and  that,  there- 
fore, some  of  the  otherwise  evil  results  of  inflation 
would  be  mitigated  or  avoided  if  we  should  deflate. 


There  are  still  outstanding  in  this  country  many 
billions  of  dollars  of  long-time  obligations  which  date 
from  the  pre-war  period,  have  still  some  years  to  run 
before  maturity,  and  which  continue  in  the  hands  of 
their  pre-war  owners.  If  they  were  to  be  paid  today, 
they  would  be  paid  in  depreciated  dollars.  If  they  were 
to  be  sold  today  they  would  be  sold  for  a  dollar  of  half 
the  value  that  was  paid  for  them ;  but  if  we  have  defla- 
tion, those  people  who  hang  on  to  these  pre-war  securi- 
ties, will  be  paid  back,  at  least  in  a  more  valuable  dol- 
lar than  we  have  today. 

Another  reason  for  deflation  is  the  influence  on 
business  men,  the  psychological  influence  on  business 
men,  of  the  present  unstable  situation.  There  is  great 
uncertainty  in  the  business  world  today.  I  needn't 
tell  you  that.  Everybody  is  uneasy.  People  don't 
know  what  is  coming ;  they  are  very  anxious  as  to  what 
will  come.  There  is  a  fear  of  panic  on  every  side. 
They  don't  publish  it  much  in  the  papers,  but  business 
men  everywhere  are  talking  about  it,  at  their  clubs  and 
in  their  social  circles.  There  is  unwillingness  to  make 
commitments  for  long-time  obligations  in  the  future; 
everyone  is  afraid  to  capitalize  present  prices. 

Now,  with  this  lack  of  confidence,  this  uneasiness, 
this  expectancy  of  trouble  and  of  decline  in  prices,  you 
can't  go  ahead  very  fast.  Business  is  too  uncertain, 
and  people  are  not  willing  to  go  ahead  on  any  substan- 
tial scale,  and  I  don't  believe  they  wdll  be  as  long  as 
they  believe  that  this  gold  basis  is  so  inadequate,  and 
the  future  is  so  uncertain. 

In  other  words,  we  must  deflate  and  get  back  on  a 
firm  basis  before  people  will  be  willing  to  go  ahead, 
and  go  ahead  in  a  business-like  way.  So  the  psycholog- 
ical situation  is  such  as  to  demand  deflation. 

Now,  it  doesn't  necessarily  mean  if  we  are  to  have 
deflation  that  we  are  to  deflate  to  anything  like  the 
pre-war  standards.  There  are  two  or  three  reasons 
for  that.  I  just  suggest  them.  One  is  that  prices  have 
been  rising  very  rapidly  before  the  war.  From  1896 
to  1913,  prices  in  this  country  rose  about  50  per  cent, 
about  3  per  cent  a  year,  so  had  there  been  no  war,  had 
there  been  no  changes  in  our  currency  and  banking 


system,  general  prices  would  probably  have  been  at 
least  20  per  cent  higher  in  1919  than  they  were  in  1913. 
Then  again,  the  war  has  brought  about  some  great 
improvements  in  our  currency  and  banking  system  the 
world  over.  The  establishment  of  the  Federal  Reserve 
system  has  eliminated  much  wasteful  use  of  money  in 
this  country.  Formerly,  we  had  our  reserves  scattered 
in  30,000  banks.  They  weren  't  centralized,  they  weren 't 
mobile,  we  couldn't  get  them  wdien  we  needed  them,  and 
we  had  to  keep  much  larger  reserves  than  would  nor- 
mally be  needed  to  support  the  same  amount  of  busi- 
ness. 

Through  the  centralization  of  reserves,  through 
the  clearing  and  collection  system  and  the  various 
other  improvements  we  have  made  in  our  bank  note 
system,  a  given  amount  of  gold  money  will  do  a  great 
deal  more  work  than  it  would  do  before. 

Furthermore,  we  have  had  a  banking  consolida- 
tion in  Europe  that  didn't  exist  before.  Our  whole 
currency  and  banking  system  is  probably  more  effi- 
cient and  then  we  have  probably  gotten  away  from  the 
idea/  that  gold  coin  will  circulate  very  much  from  hand 
to  hand.  I  think  the  time  is  past  when  we  shall  see 
very  much  gold  coin  in  circulation  either  in  this  coun- 
try or  in  Europe.  There  is  an  increasing  tendency  to 
say  that  the  proper  place  for  the  gold — the  most  effi- 
cient manner  of  using  gold — is  to  have  it  gathered  in 
the  central  banks  and  to  have  your  money  circulating 
in  the  form  of  paper  backed  by  this  gold. 

This  means  a  much  more  efficient  use  of  gold.  If 
you  use  gold  more  efficiently,  if  you  work  your  money 
machinery  more  efficiently,  you  make  each  dollar  carry 
a  bigger  load  than  it  carried  before,  and  that  has  the 
same  effect  on  prices ;  to  increase  the  supply  of  money. 

These  improvements  will  have  a  net  effect  of  per- 
manently holding  up  the  price  level  to  a  higher  posi- 
tion than  before.  So  it  seems  to  me  that  while  we  are 
bound  to  have  deflation,  we  needn't  expect  deflation 
back  to  anything  like  the  pre-war  level,  at  least  for 
many,  many  years  to  come. 

My  subject  was  ^^ Deflation,  Why  and  How?"  I 
have  tried  to  tell  you  why,  namely,  because  of  the  in- 


adequacy  of  our  gold  supply  and  of  our  reserves ;  be- 
cause we  can't  inflate  further  without  bursting;  and 
because  of  the  psychological  situation  in  the  business 
world. 

Now,  ^^How?"  It's  much  easier  to  say  it  ought 
to  be  done  than  to  tell  just  how  it  should  be  done,  and 
I  think  we  shall  have  to  come  back  to  pretty  elemen- 
tary propositions  in  this  field.  In  general,  I  think  we 
must  reverse  the  process  by  which  we  inflated. 

We  inflated  largely  through  our  system  of  float- 
ing Government  bonds,  by  unduly  encouraging  the  bor- 
row-and-buy  policy,  people  bought  bonds  of  the  Gov- 
ernment, borrowing  money  of  the  banks  to  pay  for 
them ;  and  then  the  banks  turned  the  bonds  over  as  col- 
lateral by  rediscounting  the  paper,  or  borrowing  on 
direct  15-day  loans  to  the  Federal  Reserve  banks,  the 
Federal  Reserve  banks  getting  the  bonds  back,  and  the 
resulting  bank  deposits  remaining  in  circulation.  The 
bond  borrower  too  often  got  his  bonds  not  by  his  sav- 
ings but  by  borrowing  of  the  banks.  Through  a  policy 
of  low  discount  rates,  great  liberality  in  lending, 
through  unduly  encouraging  borrowing  and  buying  (as 
contrasted  with  saving  and  buying),  we  brought  about 
a  great  part  of  this  big  expansion. 

The  Government  kept  its  discount  rate  at  the  Fed- 
eral Reserve  banks  during  the  period  after  we  got  into 
the  war  well  below  the  market  rates,  so  that  banks 
found  it  profitable  to  borrow  of  the  Federal  Reserve 
banks.  The  market,  as  they  say  in  England,  was  ^4n 
the  bank,"  and  through  that  process  we  pumped  out 
this  large  quantity  of  circulating  media — Federal  Re- 
serve notes  and  bank  deposits.  I  think  we  must  re- 
verse the  process. 

Now  that  the  war  is  over,  this  sort  of  expansion 
clearly  should  be  stopped,  and  the  Federal  Reserve 
banks  are,  with  the  co-operation  of  the  member  banks, 
taking  vigorous  measures  now  to  stop  it.  War  patriot- 
ism and  progressive  bank  credit  expansion  can  no 
longer  be  used  to  buoy  up  the  prices  of  billions  of  dol- 
lars of  war  securities  to  artificially  high  levels,  to  keep 
them  on  the  market  at  interest  rates  far  below  the 
market  rate. 


The  real  market  rate  of  interest  is  now  emerging 
and  is  dominating  the  situation.  And  it  is  a  much 
higher  rate  than  the  nominal  rate  called  for  on  our 
Grovernment  bonds.  To  an  increasing  extent,  the 
market  must  be  outside  of  the  Federal  Reserve  banks. 
Banks  must  stop  borrowing  of  the  Federal  Reserve 
banks  for  permanent  funds.  The  Federal  Reserve 
banks  were  established  for  emergency  purposes  mainly, 
not  to  provide  permanent  capital  for  member  banks, 
but  to  provide  a  ready  place  of  recourse  to  any  bank 
that  needed  funds  in  time  of  emergency  or  in  time  of 
heavy,  seasonal  demand,  if  the  bank  had  the  right  kind 
of  self-liquidating  commercial  paper  to  rediscount. 
The  Federal  Reserve  bank  rate  should  rule,  as  it  does 
usually  in  the  Bank  of  England,  higher  than  the  market 
rate,  so  that  recourse  by  the  banks  to  the  discount  and 
loan  facilities  of  the  Federal  Reserve  banks  should  be 
only  an  emergency  recourse. 

In  the  future,  preference  should  be  shown  to 
short-time  loans  of  a  self -liquidating  character.  Our 
banl^s  are  loaded  up  with  altogether  too  many  capital 
loans,  which  are  not  the  proper  kind  of  assets  against 
demand  deposits.  This  was  true  even  before  the  war 
and  now,  upon  top  of  those,  we  have  these  billions  and 
billions  of  dollars  of  the  Government  debt  in  our  com- 
mercial banks. 

To  an  increasing  degree,  loans  on  the  security  of 
Grovernment  debt  should  be  discriminated  against  by 
the  Federal  Reserve  banks  both  as  to  discount  rates 
and  in  the  matter  of  the  bank's  discretion  as  to  how 
much  they  shall  loan  and  to  whom. 

Gradually  but  firmly  the  Government  paper 
should  be  forced  out  of  the  Federal  Reserve  banks 
(this  is  commonplace,  but  it  is  important),  and  out  of 
the  commercial  member  banks  and  into  the  strong 
boxes  of  the  investing  public,  including  the  vaults  of 
savings  banks  and  insurance  companies  and  endowed 
institutions. 

The  recent  advance  in  the  interest  rate,  which  sim- 
ply removed  the  camouflage  of  an  artificial  war  rate, 
of  course  is  having  its  effect.  The  declining  prices  of 
Liberty  bonds,  although  working  great  hardship  to 


many  innocent  people  who  bought  them  in  good  faith 
at  rates  which  were  artificially  low  and  which  were 
buoyed  up  by  a  low  discount  policy  on  the  part  of  Fed- 
eral Reserve  banks  in  the  interest  of  helping  us  win 
the  war,  these  declining  prices,  although  they  are  hav- 
ing certain  bad  effects,  are  having  some  very  whole- 
some effects.  They  are  giving  these  securities  a  good 
investment  yield  and  tempting  them  out  of  the  port- 
folios of  the  bank  and  into  the  strongboxes  of  invest- 
ors. 

To  the  end  of  encouraging  this  movement,  the 
Federal  Reserve  banks  should  follow  up,  it  seems  to 
me,  their  recent  advances  in  discount  rates.  I  am  will- 
ing to  take  the  position  of  saying  that  they  should  go 
even  farther  than  thev  have,  until  the  rates  become 
more  effective  in  forcing  contraction.  We  must  have 
contraction;  we  must  get  it  cautiously  and  carefully. 
We  can't  go  ahead  with  our  business  and  make  much 
progress,  however,  until  we  get  substantial  contrac- 
tion. 

The  present  low  rate  on  certificates  of  indebted- 
ness, I  think  should  be  discontinued.  Other  methods 
need  to  be  taken,  first,  discrimination  against  specula- 
tive loans.  The  Federal  Reserve  banks  do  not  legally 
rediscount  papers  for  speculative  purposes  but  many 
banks  w^hich  have  large  speculative  accounts  are  using 
their  commercial  paper  with  the  Federal  Reserve  bank 
for  funds,  and  there  is  a  very  easy  shifting  of  funds. 
It  seems  to  me  the  Federal  Reserve  banks  might  be 
decreasingly  receptive  to  applications  for  loans  and 
rediscounts  from  banks  which  they  know  are  lending 
their  own  funds  heavily  in  the  speculative  market. 

After  the  armistice,  we  went  through  a  perfect 
orgy  of  speculation,  as  you  know.  The  number  of 
shares  traded  in  on  the  New  York  Stock  Exchange  in 
1913  w^as  eighty-three  and  five-tenths  millions,  and  in 
1919  three  hundred  sixteen  and  eight-tenths  millions. 
That  is  not  the  sort  of  thing  we  ought  to  tie  up  our 
money  in,  in  time  of  reconstruction  after  a  great  war. 
It  is  absurd  to  permit  such  a  thing. 

Then,  we  must  discriminate,  it  seems  to  me  (and 
I  am  glad  to  say  that  through  the  Federal  Reserve 


Board  and  through  the  co-operation  of  the  member 
banks,  there  is  an  increasing  recognition  of  this  fact), 
we  must  discriminate  against  luxury.  Luxury  is  all 
right  and  a  certain  amount  of  it  is  necessary,  but,  gen- 
tlemen, these  are  trying  times.  We  have  been  des- 
troying capital  on  an  unprecedented  scale.  We 
haven't  been  maintaining  our  capital  equipment  in 
hardly  any  line,  and  the  world  is  in  sore  need  of  restor- 
ation and  reconstruction,  and  luxuries  today  are  to  be 
looked  at  in  a  different  way  than  in  normal  times. 

Now  is  the  time  to  get  down  to  business  and  undo 
some  of  the  evils  of  the  war  in  an  economic  sense,  to 
reconstruct  and  rebuild  and  get  back  our  capital  equip- 
ment to  an  efficient  working  basis. 

The  so-called  expenditure  of  luxuries  since  the 
war  has  been  a  natural  one.  There  is  first  the  psycho- 
logical reaction  from  the  war  strain.  I  think  all  classes 
of  people  have  felt  it.  We  talk  about  it  most  with 
laboring  men,  but  all  classes  have  felt  it.  There  was 
a  tremendous  strain  during  the  war,  and  there  is  a 
psyqhological  reaction  that  is  natural  and  normal. 

Then  another  factor  is  this  change  in  the  distribu- 
tion of  wealth  that  I  mentioned  awhile  ago.  We  have 
taken  away  the  property  of  the  bondholding  classes, 
of  the  people  with  savings  bank  deposits,  we  have  cut 
them  in  half,  and  we  have  given  it  to  somebody  else, 
and  those  people  with  the  bonds  and  the  savings  banks 
deposits  and  with  other  fixed  incomes  to  a  great  ex- 
tent were  a  thrifty,  saving  class.  WeVe  given  it  to 
another  class,  the  new-rich. 

No  matter  how  it  is  made,  the  man  coming  into 
funds  quickly  without  strenuous  efforts  of  his  own,  is 
quite  likely  to  be  the  man  who  lets  it  go  easily  and 
spends  it  more  or  less  lavishly  till  he  learns  his  lesson. 
To  the  extent  that  this  w^ealth  has  come  in  the  hands 
of  certain  laboring  classes,  they  spend  it  in  the  form 
of  pleasure — this  they  find  most  satisfactory,  most 
pleasing  to  them — and  with  people  often  lacking  in 
culture  and  education  it  quite  often  takes  the  form  of 
display,  of  a  certain  type  of  luxury  that  shows  up 
clearly,  and  that  everybody  sees;  whereas  people  of 
education  and  training  spend  it  in  ways  that  are  less 


ostentatious  but  are  none  the  less  luxuries. 

The  situation  in  regard  to  the  expenditure  of 
money  on  luxuries  is  a  serious  one.  The  profits  in 
these  lines  have  been  great,  and  I  suppose,  in  general, 
the  profits  realized  in  the  manufacture  of  pleasure  au- 
tomobiles, silk  shirts,  and  other  typical  luxuries,  have 
been  much  larger  than  the  profits  realized  in  the  pro- 
duction of  most  lines  of  so-called  necessaries. 

The  result  is  that  producers  of  luxuries  are  able 
to  pay  the  higher  wages,  and  they  are  attracting  labor- 
ing men  away  from  the  production  of  necessaries. 
Farm  laborers  have  been  attracted  as  you  know  in 
this  country  on  a  great  scale  away  from  the  farms 
and  into  the  automobile  factories. 

The  United  States  Department  of  Agriculture  re- 
cently reported  that  the  supply  of  farm  labor  in  the 
United  States  is  about  30  per  cent  below  normal. 
Meanwhile,  the  sunr»1v  in  the  automobile  industry  is, 
I  suppose,  away  above  normal,  or  what  we  considered 
normal  in  pre-war  times.  Wages  of  farm  laborers  over 
the  country  as  a  whole  have  apparently  not  risen  any- 
thing like  as  rapidly  as  the  cost  of  living. 

Professor  Warren  of  Cornell  University  estimates 
the  number  of  vacant  farm  houses  in  New  York  State 
alone  at  24,000. 

I  was  talking  only  a  few  days  ago  with  the  head 
of  the  Department  of  Agriculture  in  New  Jersey,  and 
he  said  that  hundreds  of  farmers  over  the  State  hadn't 
been  planting  the  potatoes  this  year  that  they  normally 
would  plant  because  the  expenses  of  fertilizer  were 
so  large  and  the  difficulty  of  getting  farm  labor  was  so 
great. 

Meanwhile,  we  have  these  high  wages  in  the  produc- 
tion of  luxuries.  The  Massachusetts  Commission  on 
the  Necessaries  of  Life  in  its  report  recently  published 
found  that  seven  of  the  largest  retailers  in  Massachu- 
setts sold  in  1914,  186,000  pairs  of  silk  stockings  for 
women,  and  in  1919,  313,000  pairs. 

We  have  had  great  deterioration  in  our  machinery, 
and  our  other  capital  equipment  during  the  war.  We 
have  failed  to  maintain  their  production.  There  was 
little  building.  As  a  result  we  now  have  a  great  need 
for  restoration  and  reconstruction. 


If  we  direct  our  productive  energies  to  ephemeral 
luxuries,  what  of  the  future  ^  If  we  take  the  men  ofl 
of  the  farms  now  and  put  them  into  the  automobile 
factories,  we  may  not  feel  it  today,  but  how  about  next 
fall  and  next  winter? 

The  Massachusetts  Commission  on  the  Neces- 
saries of  Life  in  its  recent  report  said,  ^^  There  is  a 
greater  profit  in  the  manufacture  and  sale  of  luxuries 
than  necessaries  with  the  consequence  that  the  already 
depleted  productive  power  has  been  in  part  diverted 
from  the  creation  of  necessaries  to  the  production  of 
luxuries.  The  manufacturer  of  luxuries  bids  in  the 
labor  market  against  the  manufacturer  of  necessaries, 
with  the  result  that  the  cost  of  labor  and  the  cost  of 
the  ultimate  product  is  increased.  This  Commission 
has  made  efforts  to  encourage  a  greater  production  of 
necessaries  but  has  found  very  little  willingness  on  the 
part  of  manufacturers  and  retailers  to  co-operate. 
Nor  does  that  part  of  the  public  which  by  its  increase 
of  wealth  and  wages  is  able  to  indulge  its  taste  in 
more  expensive  articles,  show  greater  willingness  to 
curb  its  extravagance. '^ 

Things  are  improving.  The  recently  announced 
policy  of  the  Federal  Reserve  Board  and  the  Federal 
Reserve  banks  of  encouraging  discrimination  against 
loans  on  luxuries  is  certainly  wholesome.  Reports  are 
received  on  every  side  that  the  banks  are  co-operating, 
and  this  is  a  promising  sign. 

And  right  here,  I  want  to  say,  it  seems  to  me,  that 
men  in  your  lines,  the  Robert  Morris  Associates,  have 
a  great  opportunity,  and  I  think  also  a  great  public 
responsibility.  You  are  not  only  the  trustees  in  the 
sense  of  your  banks,  but  you  are  also  trustees  of  the 
public  interest.  We  have  all  recognized  for  a  long 
time  that  the  bank  is  affected  with  a  great  public  in- 
terest, and  certainly  the  credit  department  of  the  bank, 
of  all  departments,  is  the  one  that  is  affected  by  the 
greatest  public  interest,  and  I  know  of  no  time  in  the 
history  of  the  United  States  when  that  has  been  so 
true  as  it  is  now. 

Such  influence,  it  seems  to  me,  as  you  gentlemen 
have,  and  as  you  can  honestly  and  fairly  exercise, 


should  be  against  credit  expansion  at  the  present  time, 
and  should  be  in  favor  of  discriminating  against  the 
production  of  luxuries  and  for  the  production  of 
necessaries,  and  of  much-needed  capital  equipment. 

A  few  other  suggestions  to  help  this  deflation 
movement  I  will  merely  mention  in  closing.  The 
Federal  Reserve  banks  should  discriminate  against 
banks  with  large  rediscount  ratios  to  capital  funds. 
I  have  been  quite  surprised,  in  connection  with  a  study 
I  recently  made,  at  the  great  increase  in  the  ratio  of 
bank  deposits  to  bank  capital  surplus  and  profits  dur- 
ing the  war.  I  have  a  chart  here,  I  don't  know  if  you 
can  see  it  across  the  room,  but  this  is  w^hat  has  been 
happening.  This  curve  is  the  ratio  of  ^* capital  funds.'' 
That  is,  the  funds  represented  by  capital,  surplus  and 
profits  to  deposits  in  national  banks,  from  1870  to  the 
present  time.  The  average  ratio  has  gone  down  from 
over  a  hundred  in  1870  to  less  than  20  now. 

There  are  a  number  of  banks  whose  deposits  are 
20,  25,  and  in  some  cases  30  times  the  capital.  There 
has  been  a  great  unevenness  there,  and  during  the  war 
the  average  ratio  of  capital  to  deposits  has  been  cut  in 
half  in  national  banks. 

If  you  take  the  bank  deposits  of  the  national  banks 
of  this  country  as  of  1919,  and  measure  them  in  terms 
of  a  dollar  of  the  purchasing  power  of  1913,  you  will 
find  they  haven't  increased  a  bit.  I  figured  it  out  the 
other  day  and  was  surprised  to  find  that  if  you  call 
the  purchasing  power  of  the  deposits  of  national  banks 
of  1913  100  per  cent.,  the  purchasing  power  of  the  de- 
posits in  national  banks  in  1919  was  99.8  per  cent. 
Meanwhile,  the  ratios  of  capital  and  of  capital  funds 
to  deposits  have  gone  away  down.  It  seems  to  me  the 
Federal  Reserve  authorities  in  enforcing  the  Phelan 
Act  may  well  say  that  we  will  discriminate  against 
banks  whose  rediscounts  are  large  in  proportion  to 
their  capital  funds. 

Then,  I  think,  commercial  banks  should,  to  an  in- 
creasing extent,  discriminate  against  capital  loans,  no 
matter  in  what  guise  they  are  made.  This  is  especially 
true  when  the  banks  are  loaded  up  with  so  much  war 
paper.    Capital  loans  are  important,  but  they  are  the 


business  of  other  banks  than  commercial  banks  whose 
deposits  are  largely  demand  deposits.  I  needn't  say 
that  one  of  the  most  urgent  things,  if  we  are  going  to 
deflate,  is  to  curb  Government  extravagance,  and  right 
here  I  am  willing  to  risk  saying,  despite  the  combative 
tendency  of  these  Irishmen,  that  I  think  one  of  the 
things  to  do  in  this  direction  is  to  put  a  quietus  for 
the  present  at  least  to  all  suggestions  of  a  big  war 
bonus.  It  seems  to  me  we  ought  to  go  the  limit  to  take 
care  of  people  that  suffered  during  the  war,  were 
maimed,  or  otherwise  suffered,  but  when  it  comes  at 
this  time  to  floating  a  big  Government  loan  or  to  im- 
posing taxes  on  necessaries  for  a  huge  war  bonus,  I 
think  that  would  be  a  movement  directly  in  the  line 
of  causing  greater  inflation.  The  Government  now,  of 
all  times,  must  live  on  its  income  and  must  curb  all 
sorts  of  extravagant  expenditures. 

We  should  turn  stolidly  away  from  all  suggestions 
to  restrict  the  outward  movement  of  gold.  We  have 
the  strongest  pull  of  any  country  in  the  world  on  the 
\Yorld's  gold  supply;  and  we  have  the  largest  amount 
of  any  country;  we  are  a  creditor  nation  to  a  larger 
extent  than  any  other  nation.  A  certain  amount  of 
gold  goes  out,  in  the  normal  course  of  trade,  and  we 
should  let  it  go,  it  seems  to  me,  thereby  keeping  our 
dollar  on  a  gold  basis,  instead  of  artificially  buoying  it 
up  by  putting  an  embargo  on  gold,  as  some  people  are 
now  agitating,  and  thereby  ultimately  depreciating  the 
dollar  and  getting  ourselves  off  the  gold  basis. 

Our  physical  volume  of  business  must  grow  up- 
ward toward  the  currency  just  as  the  circulation  is 
being  reduced  toward  the  physical  volume  of  business. 
We  must  stimulate  production  in  every  way  possible 
while  we  are  contracting  the  currency.  Business  must 
grow  up  to  the  currency  while  the  currency  is  being 
contracted. 

It  is  a  trying  time  for  labor  because  of  these  mal- 
adjustments; it  is  a  trying  time  for  capital,  yet  there 
was  never  a  time  when  sympathetic  co-operation  was 
more  needed.  Both  classes  are  irritable,  and  it  seems 
to  me  that  of  all  times  for  charity  in  this  direction, 
now  is  the  time  it  is  needed  most. 


And  finally,  if  I  were  to  summarize  the  rest  I  have 
to  say  in  three  words,  I  would  say,  ^^Work,  Save,  and 
Pay-Up. ' '    (Applause. ) 

The  President,  Mr.  Jos.  L.  Morris:  Gentlemen, 
Professor  Kemmerer  as  part  of  the  program  is  not  yet 
finished.    We  are  now  to  have  the  dessert. 

Professor  Kemmerer  has  been  good  enough  to  con- 
sent to  opening  the  floor  to  a  discussion  of  the  subject 
that  he  so  ably  presented.  With  his  consent,  I  am  able 
to  say  that  you  may  feel  free  to  ask  any  question  per- 
tinent to  the  subject.  Will  you  ask  some  questions 
now  ?  Mr.  Crane,  have  you  anything  to  say  on  the  sub- 
ject  ?  I  saw  3^ou  making  some  notes  over  there,  so  I  as- 
sumed you  were  priming  yourself  for  it. 

Mr.  Crane  :  I  haven 't  primed  myself  for  any  ques- 
tions, but  I  was  wondering  if  the  Professor  had  in 
mind  any  method  by  which  the  Federal  Reserve  banks 
would  discriminate  between  essential  and  non-essen- 
tial loans,  as  to  the  applying  it  in  various  territories 
and  various  banks. 

Professor  Kemmerer:  I  think  that  is  one  of  the 
most  difficult  questions  to  answer.  No  one  has  yet,  as 
far  as  I  know,  made  a  satisfactory  definition  as  to  what 
an  essential  and  a  non-essential  is. 

During  the  war  we  had  a  committee  of  the  Amer- 
ican Economic  Association  on  the  subject  of  the  pur- 
chasing power  of  mone}",  and  one  of  the  propositions 
we  were  asked  to  consider  was  the  line  you  could  draw 
between  essentials  and  non-essentials.  But  we  very 
quickly  gave  it  up.  The  only  thing  that  was  suggested 
that  practically  every  one  admitted  was  a  non-essential 
in  this  country  was  orchids  from  South  America. 
Someone  suggested  that  the  production  of  certain  vic- 
trolas  or  of  certain  high-grade  pianos  were  non-essen- 
tials, but  it  was  quickly  pointed  out  that  they  were  im- 
portant in  the  war,  from  the  standpoint  of  the  soldiers' 
necessary  recreation,  and  it  was  also  pointed  out  that 
a  considerable  amount  of  beef  that  was  coming  in  from 
Argentine  to  feed  our  soldiers  was  being  paid  for  by 
pianos  sent  there  from  here.  So,  many  of  the  so-called 
luxuries  were  in  fact  essentials. 

All  I  can  say  is  that  the  member  banks  themselves, 


while  they  can't  draw  a  sharp  line,  can  draw  a  certain 
line.  The  could  say  for  example  that  the  lending  of 
money,  in  connection  with  the  purchase  of  pleasure  au- 
tomobiles, should  at  most  not  be  larger  than  it  was 
before. 

I  think  the  Federal  Reserve  banks  can  lay  down 
the  general  principle  and  leave  it  to  many  member 
banks  to  carry  out,  and  member  banks  are  shomng  a 
spirit  of  co-operation.  Then  I  think  that  there  can 
be  limitations  in  regard  to  the  proportion  of  loans  that 
are  made  to  the  capitals  of  these  member  banks. 

I  think  that  any  member  bank  that  is  found  lend- 
ing money  very  extensively  on  the  production  of  silks, 
of  pleasure  automobiles  and  of  certain  other  things  of 
that  type  should  be  told  that  there  were  limits  there, 
and  that  the  Federal  Reserve  bank  would,  in  granting 
rediscounts,  stand  so  straight  as  to  lean  backwards  in 
the  public  interest. 

I  don't  know  how  to  lay  any  definite  rule  except 
the  rule  of  reason.  I  wish  I  could  answer  your  ques- 
tion, but  I  can't. 

Mr.  Herrick  (Cleveland)  :  Do  you  believe  that  de- 
flation has  commenced^ 

Professor  Kemmerer  :  Yes,  but  I  think  it  will  be 
very  uneven,  very  irregular,  and  exceedingly  unpopu- 
lar. I  am  inclined  to  think  that  it's  commenced  but  it 
hasn't  progressed  very  far,  and  I  expect  to  see  the 
price  level  jumping  up  and  down,  but  with  a  downward 
tendency. 

Mr.  Herrick  :  You  think,  then,  that  it  will  be  dis- 
orderly ? 

Professor  Kemmerer  :  I  think  we  shall  have  a  per- 
iod of  business  depression  running  over  considerable 
time.  I  am  not  expecting  a  panic.  I  am  expecting  a 
period  of  business  depression  because  of  declining 
prices,  anticipation  of  further  declines,  and  because  of 
a  tightening  of  the  money  market. 

Before  the  Federal  Reserve  Act  was  passed,  we 
came  up  against  a  stone  wall  in  a  time  of  financial 
strain.  Now  with  the  Federal  Reserve  system  with  its 
more  or  less  elastic  reserve  requirements,  with  the  pro- 
vision in  the  act  that  in  times  of  emergency  the  Federal 


Reserve  Board  can  waive  any  and  all  reserve  require- 
ments, we  have  a  movable  screen,  and  as  pressure  be- 
comes strong  there  will  be  a  giving  and  yielding.  The 
great  danger  is  that  they  will  yield  too  much. 

Deflation  will  be  very  unpopular  politically ;  it  will 
be  very  unpopular  in  business  circles,  and  the  pressure 
to  reduce  the  federal  reserve  bank  discount  rates  and 
to  permit  the  banks  to  borrow^  at  these  lower  rates  and 
get  permanent  capital  from  the  Federal  Reserve  banks 
in  this  way  will  be  strong.  I  am  not  looking  for  a  crash, 
however,  I  am  looking  for  a  long  period  of  depression. 

Mr.  Herrick:  Do  you  believe  a  panic  is  possible 
under  these  conditions'? 

Professor  Kemmerer:  Yes,  but  improbable.  I 
think  it  is  possible,  I  think  that  we  might  have  a  gen- 
eral strike  or  there  might  be  a  breakdown  in  Europe 
or  something  of  the  kind,  and  we  might  have  a  panic. 
I  don^t  agree  with  those  people  who  say  that  with  the 
coming  of  the  Federal  Reserve  system  all  possibility  of 
panic  is  passed.  But  taking  the  situation  as  it  is,  and 
in  the  absence  of  some  catastrophe,  a  panic  is  improb- 
able during  the  rest  of  this  year. 

Mr.  Herrick:  May  I  answer  Crane's  question 
about  essential  and  non-essential  industry  ?  I  thought 
I  had  discovered  three  years  ago  a  non-essential — I  saw 
a  lady  wearing  a  court-plaster  beauty  spot,  but,  upon 
telling  another  lady  of  it,  I  decided  I  was  entirely 
wrong. 

Mr.  Sheary  (of  Troy,  N.  Y.)  :  I'd  like  to  ask  if 
you  would  advocate  the  substitution  of  a  sales  tax  for 
the  excess  profits  tax  in  the  interest  of  the  economy 
that  you  urge.  Now  I  want  to  qualify  that  somewhat, 
in  that  the  sales  tax  would  apply  only  to  articles  other 
than  foodstuffs,  which,  of  course,  would  hit  the  poor 
man  pretty  hard;  it  would  make  it  unjust. 

Professor  Kemmerer:  We  are  getting  over  into 
the  field  of  taxation  here.  That  is  a  pretty  big  question. 
My  own  judgment  is  that,  contrary  to  the  general  im- 
pression of  the  financial  press  and  of  a  great  many  of 
my  best  friends,  in  times  like  these  the  excess  profits 
tax  is  not,  and  in  the  next  year  or  so  the  excess  profits 
tax  is  not  to  any  great  extent  likely  to  be  shifted  and 


that  a  tax  on  sales  would  be  cumulative,  and  very  in- 
equitable in  its  incidence.  What  is  finished  product 
for  one  industry  is  the  raw  material  for  another.  A 
sales  tax  catches  an  article  at  many  different  stages  of 
its  progress  toward  the  final  consumer. 

If  a  tax  on  sales  reaches  necessities  (and  almost 
everything  is  a  necessity  under  certain  circumstances), 
the  people  who  buy  those  necessities  will  pay  it,  and 
the  tax  would  be  shifted  to  a  great  extent  to  the  people 
who  could  least  afford  to  pay  it. 

I  hope  we  will  have  the  most  rigid  economies  but 
I  don't  believe  in  a  general  sales  tax  or  a  general  sales 
tax  exclusive  of  foods.  I  think  in  its  final  instance  it 
would  be  very  burdensome  and  would  ultimately  land 
largely  on  the  shoulders  of  the  people  who  have  al- 
ready stood  a  good  part  of  the  burdens  of  the  war, 
the  people  whose  incomes  have  not  increased  as  rap- 
idly as  the  cost  of  living. 

Mr.  Snyder  (Philadelphia)  :  Dr.  Kemmerer,  you 
have  spoken  in  comparison  of  the  present  period  of  in- 
flation with  other  periods  of  inflation.  Have  other  per- 
iods of  inflation  been  accompanied  usually  by  an  over- 
production of  goods? 

Professor  Kemmerer:  I  don't  think  there  is  such 
a  thing  as  an  over-production  of  goods.  You  can  have 
an  over-production  of  a  particular  line  of  goods  in  re- 
lation to  the  market  at  the  time,  but  I  don't  think  you 
can  have  an  over-supply  of  goods  in  general,  because 
no  one  has  all  the  goods  he  wants  and  I  don't  think 
that  you  can.  I  gave  an  illustration  today  in  conver- 
sation. We  were  discussing  that  very  point.  The  il- 
lustration is  a  very  simple  one. 

First  let  me  lay  down  the  general  principle  that 
price  equilibrates  demand  and  supply.  You  can  think 
of  demand  on  one  side  and  supply  on  the  other,  and  the 
price  as  the  fulcrum,  moving  back  and  forth,  at  such 
a  rate  that  supply  and  demand  are  kept  in  equilibrium. 

Suppose  you  go  down  the  Boardwalk  and  see 
strawberries  at  $2.50  a  basket,  a  large  supply  of  them. 
People  would  say,  ^^Why,  the  supply  of  strawberries 
is  far  in  excess  of  the  demand."  Nobody  is  buying 
them.    Suppose  there  should  be  a  rumor  come  in  that 


there  was  going  to  be  a  good  supply  of  strawberries 
on  the  market  and  that  the  merchants  should  get  the 
rumor  but  the  public  shouldn't  receive  it.  The  mer- 
chants would  want  to  unload  their  berries  quickly. 
Take  an  extreme  case.  We  can  often  best  illustrate 
by  extreme  cases.  Suppose  they'd  immediately  cut  the 
price  of  strawberries  to  25  cents  a  basket.  Then  the 
demand  would  be  greatly  in  excess  of  the  supply. 

Now,  the  price  at  which  demand  and  supply  are 
equalized  over  any  considerable  period  of  time  is  the 
real  market  price ;  it  equilibrates  demand  and  supply. 
You  can  have,  of  course,  a  surplus  of  goods  on  the 
market  at  the  current  price  or  even  at  the  manufac- 
turing price,  but  if  you  do,  the  price  tends  to  go  down, 
the  manufacturing  falls  off  and  in  time  there  is  a  re- 
adjustment. You  may  also  have  a  demand  at  a  cur- 
rent price  in  excess  of  the  supply  at  that  price.  Busi- 
ness men  will  be  unable  to  fill  all  their  orders.  But  in  a 
very  short  time  that  demand  will  force  up  the  price  un- 
til the  price  gets  to  the  point  where  it  equilibrates  de- 
mand and  supply. 

So  if  you  allow  for  a  reasonable  amount  of  fric- 
tion and  a  reasonable  time  of  adjustment,  I  don't 
think  you  can  say  supply  exceeds  demand  or  demand 
exceeds  supply.  You  can  say  demand  exceeds  supply 
at  a  given  price  or  supply  exceeds  demand  at  a  given 
price,  but  when  you  have  that  situation,  you  have  an 
unstable  situation  at  which  the  price  tends  to  move 
so  as  to  equilibrate. 

Mr.  Snyder  :  Is  it  possible  to  generalize  upon  the 
conditions  of  supplies  and  demand  in  these  previous 
periods  of  depression  as  compared  with  the  present 
condition  ? 

Professor  Kemmerer:  I  think  it  is  pretty  dan- 
gerous. You  can  always  get  lessons  from  the  preced- 
ing conditions  and  we  have  a  great  many,  I  think,  from 
the  conditions  succeeding  the  Civil  War.  As  you  per- 
haps realize,  prices  increased  more  rapidly  during  this 
war  than  they  did  during  the  most  trying  days  of  the 
Civil  War.  Wholesale  prices  in  the  United  States 
rose  considerably  higher  relative  to  1913  than  the  worst 
greenback  prices  did  during  the  Civil  War,  when  the 


greenback  depreciated  to  35  cents  on  the  dollar. 

It  doesn^t  make  any  difference  to  you  or  to  me 
as  far  as  buying  goods  are  concerned  if  the  prices  of 
the  goods  we  are  buying  are  doubled,  whether  they  are 
doubled  because  the  paper  money  is  depreciated  in 
terms  of  gold  or  because  the  gold  itself  is  depreciated. 

I  think  we  are  going  to  have  a  period  of  deflation 
much  like  we  had  after  the  Civil  War.  It  took  from 
1863  to  1879  before  they  got  back  to  a  gold  basis,  and 
I  think  we  will  probably  have  a  period  of  years  before 
we  get  deflated  and  we  shall  have  much  the  same  sort 
of  experience,  though  perhaps  not  so  long  drawn  out, 
and  I  don't  think  wages  will  lag  behind  like  they  did 
then  because  we  have  a  stronger  organization  of  trade 
unions. 

Mr.  Snyder  :  We  have  usually  been  taught  that  a 
panic  has  been  preceded  by  an  over-production  of 
goods.  I  think  the  opinion  of  all  of  us  at  the  present 
time  is  that  there  is  a  decided  under-production  of 
goods  and  I  am  wondering  whether  that  will  not  be 
one  of  the  cushions  in  this  process  of  deflation,  because 
factories  are  all  behind  in  their  orders  and  they  can't 
produce  not  luxury  goods  but  goods  of  necessity  at  a 
rapid  enough  rate  to  supply  the  demand.  It  would 
seem  to  me  from  that  that  deflation  might  be  cush- 
ioned somewhat  as  compared  to  other  periods. 

Professor  Kemmerer:  I  think  that  is  a  relative 
matter.  I  won't  be  surprised  at  all  if  you  find  in  the 
next  week  or  so  plenty  of  signs  of  over-production  of 
goods.  That  is,  if  the  buying  public  begin  to  make  up 
their  mind  that  prices  are  going  down,  as  apparently 
Mr.  Wanamaker  did  a  short  time  ago  and  some  other 
concerns,  then  merchants  and  manufacturers  are  going 
to  say,  **If  prices  are  going  down,  we  want  to  unload 
these  goods  at  this  price  level  before  they  get  lower," 
and  the  present  so-called  scarcity  of  goods  will  begin 
to  take  the  form  of  a  superfluity  of  goods.  They  will 
want  to  unload  before  the  prices  break. 

There  is  always  an  evidence  of  scarcity  of  goods 
when  prices  are  going  up  because  the  people  are  hold- 
ing back  goods  in  anticipation  of  higher  prices,  buying 
low  and  selling  at  a  continually  higher  price,  but  when 


prices  fall,  then  the  opposite  takes  place,  and  the  su- 
perficial evidence  is  that  there  is  an  oversupply  of 
goods  because  buyers  are  holding  off  for  lower  prices 
and  sellers  are  trying  to  unload  before  the  lower  prices 
come. 

Mr.  Burnett  (Richmond)  :  I  want  to  ask  Pro- 
fessor Kemmerer  if  he  has  taken  into  consideration 
our  peculiar  method  of  computing  reserves  before  the 
establishment  of  the  Federal  Reserve  Bank.  For  in- 
stance, he  spoke  of  25  per  cent,  of  reserves  in  New 
York  but  you  all  remember  we  had  a  sliding  scale  of 
reserves,  country  banks  getting  15  per  cent. 

Professor  Kemmerer  :  I  will  answer  that  and  say 
that  I  have  been  quoting  ultimate  reserves,  and  the 
way  I  have  worked  this  out  is  this :  I  have  said.  Here 
are  three  national  banks,  one  a  central  reserve  city 
bank,  one  a  reserve  city  bank,  and  one  a  country  bank. 
I  assume,  to  get  a  basis  to  work  on,  that  each  bank  had 
a  million  two  hundred  thousand  dollars  of  demand  de- 
posits, three  hundred  thousand  dollars  of  time  depos- 
its, and  one  hundred  thousand  dollars  of  bank  notes 
outstanding.  Then  I  ask  how  much  money  was  re- 
quired, in  1913,  to  exist  somewhere  against  that.  I  al- 
low for  the  deposited  reserves,  I  allow  for  the  fact  that 
the  redemption  fund  was  counted  as  reserve  money 
then  and  not  now,  I  allow  for  all  these  facts  you  men- 
tion and  carry  the  calculation  back  to  find  out  just 
how  many  dollars  must  legally  exist  somewhere  in  re- 
serve against  these  liabilities.  The  amount  is  about 
one-fifth  now^  what  it  was  in  1913. 

Mr.  Burnett  :  What  I  had  in  mind  was  this :  In 
the  days  before  the  Federal  Reserve  Bank,  the  ulti- 
mate reserve,  federal  reserve  of  a  country  bank  was 
six  or  six  and  three-fifths,  or  something  of  that  sort. 

Professor  Kemmerer:  That  was  fully  allowed 
for. 

Mr.  Wohnseidler  (New  York)  :  I  would  like  to 
ask  if  you  said  that  you  advocated  Federal  Reserve 
Banks  discriminating  against  loans  made  on  Govern- 
ment securities  in  favor  of  commercial  loans. 

Professor  Kemmerer  :  Yes,  sir. 

Mr.  Wohnseidler:  And  would  you  consider  it 


good  business  to  have  the  Federal  Reserve  Banks 
charge  a  higher  rate  rediscount  on  a  Liberty  Bond 
than  on  commercial  loan  to  force  the  national  bank 
to  take  up  that  loan,  to  borrow  it  on  straight  paper 
without  collateral? 

Professor  Kemmerer  :  No,  I  think  that  in  organ- 
izing the  Federal  Reserve  Banks  there  was  no  idea 
that  the  Federal  Reserve  Banks  would  lend  any  con- 
siderable money  on  Government  bonds.  The  war  came 
on,  we  were  under  most  strenuous  conditions  and  we 
adopted  a  policy  of  a  low  rediscount  rate,  encourag- 
ing borrowing  and  buying  in  order  to  float  these  bonds. 
That  loaded  the  banks  up  so  that  at  one  time  we  had 
nearly  seven  billion  dollars  of  Government  paper  in 
the  banks.  That  is  an  anomalous  situation.  These 
are  commercial  banks,  the  Federal  Reserve  Banks  are 
sujjposed  to  help  commercial  banks  and  not  to  encour- 
age capital  loans  or  Government  loans. 

Now,  I  think  that  the  place  for  the  Government 
bonds  is  in  the  investors'  strongboxes.  I  think  it  was 
unfortunate  that  we  tried  to  float  those  bonds  at  the 
ai^tificially  low  rates  w^e  did,  buoying  them  up  by  these 
artiflcially  low  discounts  (applause) ;  but  having  done 
so,  we  must  undo  the  evil  as  soon  as  practicable.  We 
can't  have  deflation  as  long  as  we  have  this  big  credit 
expansion  on  the  basis  of  these  government  bonds  in 
the  banks.  The  people  who  have  bought  Government 
bonds  by  borrowing  the  money  should  pay  up.  If  they 
bought  them  on  installments  they  should  pay  up  and 
pay  up  rapidly  and  save  to  do  it;  and  if  they  bought 
so  much,  perhaps  foolishly  or  under  patriotic  stress 
or  what  not,  that  they  have  to  carry  it  along  indef- 
initely with  the  bank,  I  think  there  is  nothing  for 
them  to  do  but  to  dispose  of  the  bonds  and  pay  up. 
Let  the  bonds  go  into  the  hands  of  permanent  invest- 
ors. 

I  think  it  would  be  a  great  mistake  to  continue 
our  high  prices,  our  inflated  currency,  our  unstable  sit- 
uation just  for  the  purpose  of  buoying  up  Liberty 
Bonds  so  that  they  can  be  kept  at  a  four  and  three- 
quarters  or  four  and  a  quarter  per  cent  basis.  We 
made  our  mistake  when  we  tried  to  float  them  too  low. 


but  having  made  it,  we  shouldn't  continue  it  indef- 
initely. There's  a  good  deal  to  be  said,  I  think,  in 
favor  of  a  refunding  of  those  bonds  at  a  fair  market 
rate  of  interest,  but  I  realize  a  great  many  of  them 
are  not  now  in  the  hands  of  the  people  that  originally 
bought  them,  and  no  matter  what  the  Government 
should  do  in  the  line  of  refunding  there  w^ould  be  a 
great  deal  of  suffering. 

Mr.  Seed  (San  Francisco)  :  Dr.  Kemmerer,  hav- 
ing been  so  kind  so  far  as  to  make  no  adverse  refer- 
ence to  the  products  from  my  own  beloved  State,  I 
make  so  bold  as  to  ask  him  if  he  would  ask  the  men 
from  Detroit  (if  they  are  still  alive)  whether  they  are 
willing  to  take  an  order  now  for  a  flivver  at  $50  or 
wait  for  an  uncertain  market,  say  three  weeks,  when 
they  have  a  chance  of  getting  $5,000.    (Laughter.) 

Mr.  Meyers  (Chicago)  :  I'd  like  to  ask  a  question 
which  I  think  would  prove  of  general  interest.  Do 
you  think  there  should  be  any  discriminatory  rates 
against  certain  lines  of  industry — say,  for  example, 
against  lines  of  industry  that  are  temporarily  hard 
pressed  or  temporarily  need  funds,  like  sometimes  the 
livestock  industry,  other  times  industries  in  agricul- 
tural lines  or  perhaps  sometimes  in  manufacturing 
lines  1 

Professor  Kemmerer:  Yes,  it  seems  to  me  that 
that  is  clearly  true,  just  as  an  individual  bank  must 
discriminate  on  the  basis  of  conditions  at  the  time,  so 
the  Federal  Reserve  Banks  should.  Here  is  a  point 
I  made  in  another  discussion  the  other  day.  The 
Phelan  Bill  provides  for  certain  progressive  rates. 
That  is,  if  a  bank  gets  a  line  of  rediscount  above  a 
certain  percentage  of  its  ordinary  deposits,  why  the 
rate  can  go  up.  Now,  it  seems  to  me  it  would  be  an 
advisable  thing  in  view  of  the  shortage  of  capital  in 
the  banks,  the  failure  to  increase  the  capital  in  pro- 
portion to  the  increase  in  deposits,  to  make  that  ratio 
which  is  the  determining  factor  under  the  Phelan  Act, 
a  ratio  not  to  deposits  but  to  capital  funds.  A  bank 
that  was  borrowing  very  heavily  in  proportion  to  its 
capital  surplus  and  undivided  profits  should  have  the 
higher  rate  charged  after  it  got  above  a  fairly  normal 


point,  but  it  wouldn't  do  to  take  a  particular  month 
because,  for  instance,  it  might  be  in  a  potato  raising 
country  and  at  potato  time  there  would  need  to  be 
very  heavy  loans.  Federal  Reserve  Banks  would  need 
to  help.  In  strawberry  time  they  should  make  larger 
advances  to  banks  in  the  strawberry  districts  to  help 
there.  There  are  seasonal  demands  in  almost  all  indus- 
tries, and  so  I  would  say,  to  meet  that,  this  ratio  would 
have  to  be  the  ratio  not  at  the  particular  month  but  the 
average  ratio  for  the  year.  Then  I  'd  make  very  liberal 
allowance  for  special  cases  of  the  type  you  mention. 

Mr.  Wagenfuehr  (St.  Louis)  :  Doesn't  it  seem 
to  you.  Professor,  that  as  we  proceed  with  deflation 
we  will  have  less  and  less  labor  trouble  ? 

Professor  Kemmerer:  I'm  afraid  not.  I  wish  I 
could  say  it  did.  The  laboring  people  felt  that  their 
wages  were  low  before  the  war.  From  1896  to  1913 
the  cost  of  living  increased  40  or  50  per  cent,  and  in 
comparatively  few  lines  did  wages  go  up  as  rapidly. 
Now  in  many  lines  wages  have  gone  up  since  the  war 
more  rapidly  than  the  cost  of  living  and  those  fellows 
say,  ^^Yes,  but  a  considerable  part  of  that  is  just  mak- 
ing up  for  what  we  lost  during  the  period  from  1896 
to  1913." 

Furthermore,  Mr.  Gompers  says  that  this  talk 
that  wages  should  just  increase  as  much  as  the  cost 
of  living  is  an  unreasonable  position  to  take.  He  says 
that  in  the  past  laboring  men  didn't  receive  their  fair 
share  of  the  national  product  and  that  if  you  say  their 
wages  should  just  increase  according  to  the  cost  of 
living,  you're  condemning  them  to  a  static  condition, 
no  improvement  at  all.  If  the  cost  of  living  doubles, 
double  the  wages;  if  it  trebles,  treble  the  wages;  etc. 
The  laboring  man  wouldn't  improve  his  condition  at 
all. 

He  says  that  laboring  men  ought  to  participate  in 
the  improvement  society  is  making,  and  he  would  go 
still  further  and  say  that  they  didii't  have  anything 
like  their  share  of  the  products  in  1913  and  they  ought 
to  have  a  larger  basic  share. 

I  am  not  going  into  that  but  I  do  think  laboring 
men  are  going  to  fight  to  the  limit  for  the  gains  they 


have  gotten,  and  they  will  not  concede,  if  they  can 
help  it,  to  a  reduction  in  wages.  If  reductions  take 
place,  I  think  they  will  come  this  way:  Business  de- 
pression causes  unemployment.  Unemployment  tends 
to  break  the  unions  because  the  men  that  are  out  of  a 
job  tend  to  drop  away  from  the  union,  don't  pay  their 
dues  and  so  on.  You  have  an  increasing  number  of 
non-trade  union  men  looking  for  jobs  under  heavy 
pressure  and  they  break  down  the  strength  of  the  un- 
ion. It  seems  to  me  we  will  get  a  decline  in  wages 
through  unemployment. 

Mr.  Wagenfuehr:  But  with  that  situation  you 
would  have  less  labor  trouble ;  I  mean  from  the  stand- 
point of  having  strikes,  if  you  have  more  unemploy- 
ment. 

Professor  Kemmerer:  The  minute  any  effort  is 
made  to  reduce  the  standard  wage,  you  are  going  to 
have  strikes  right  and  left,  but  the  unions  may  be 
weakened  somewhat  temporarily  during  that  period. 
I  think  it  would  be  rash  to  say  that  we  would  have 
less  labor  trouble. 

Mr.  Wagenfuehr:  We  are  having  a  less  number 
of  strikes. 

Professor  Kemmerer  :  But  the  individual  strikes 
are  greater  in  importance. 

President  Morris  :  Professor  Kemmerer,  you  have 
been  very  kind.  We  don't  want  to  abuse  our  privi- 
lege. You  can  judge  from  the  questions  that  have  been 
asked  that  your  discussion  has  been  very  closely  fol- 
lowed and  very  much  appreciated. 

I  think  this  is  the  proper  place  to  applaud  Pro- 
fessor Kemmerer.  (Applause  from  audience  stand- 
ing.) 

Professor  Kemmerer:  I  would  like  to  say  just 
one  word  and  that  is,  you  have  asked  me  definite  ques- 
tions and  I  have  tried  to  give  in  a  few  words  my  an- 
swers. Please  don't  think  that  I  am  posing  here  as 
an  authority  on  these  questions  in  giving  you  an  ipse 
dixit  on  it.  I  have  the  gravest  doubts,  like  all  the  rest 
of  you,  on  them.  I  am  just  trying  to  give  you  my  re- 
action in  as  few  words  as  I  can  on  the  big  points,  and 
I  say  it  with  great  hesitation  because  I  don't  feel  at 
all  cock  sure  of  these  opinions.    (Applause.) 


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